Approximately 60.6% of respondents use third-party staking platforms, and they tend to prefer large, integrated platforms.
Authors: Tricia Lin & Daniel Shapiro
Compiled by: Deep Tide TechFlow
Key Takeaways
The survey shows that the majority of respondents (69.2%) are currently staking Ethereum (ETH), with 78.8% being investment firms or asset management companies. This indicates that institutional participation in ETH staking has reached a certain scale, primarily driven by yield and contributions to network security.
Approximately 60.6% of respondents use third-party staking platforms, and they prefer to choose large, integrated platforms. These platforms can address issues such as low capital efficiency and technical complexity encountered when staking individually.
Liquid Staking Tokens (LSTs) are becoming increasingly popular as they enhance capital efficiency, keep staked ETH liquid, and can be used for decentralized finance (DeFi) strategies. 52.6% of respondents hold LSTs, and 75.7% of respondents are willing to stake ETH through decentralized protocols.
Distributed Validators (DVs) are gaining popularity among institutional participants due to their enhanced security and fault tolerance. Over 61% of respondents indicated they would be willing to pay extra for the security advantages provided by DVs.
Introduction
As the cryptocurrency industry continues to evolve, staking has become an important way for institutional investors to earn yields and enhance network security. However, institutional investors still face a complex environment when it comes to staking.
This research report provides a comprehensive analysis of the staking behavior of institutional token holders, with a particular focus on the Ethereum ecosystem. Our primary research objective is to reveal the current state of institutional staking, explore the motivations of market participants, and identify the challenges they face. By collecting survey data from various types of institutional stakers (such as exchanges, custodians, investment firms, asset management companies, wallet providers, and banks), we aim to provide valuable insights for the market of distributed validators and multi-validator models, helping both newcomers and established participants better understand the complexities of this rapidly evolving field.
The survey included 58 questions covering ETH staking, Liquid Staking Tokens (LSTs), and related topics. We employed various question formats, including multiple-choice, Likert scales, and open-ended questions, allowing respondents to selectively skip certain questions. The survey results indicate:
The majority of respondents (69.2%) are currently staking ETH.
Most respondents are institutional participants:
78.8% are investment firms or asset management companies
- Among these institutions, about 75% focus on investing in crypto assets
9.1% are custodians
9.1% are exchanges or wallet providers
12.1% are blockchain networks or protocols
4.2% are market makers or trading firms
0.8% belong to other categories
Respondents demonstrated a broad knowledge of staking economics and generally had a high level of self-awareness regarding the concept of staking and associated risks.
Geographic diversity among respondents and node operators: Although specific locations were not provided, many respondents emphasized the importance of geographic diversity among node operators.
Current State of ETH Staking
Since the Ethereum network upgraded to Proof of Stake (PoS), the environment for ETH staking has changed significantly, an event known as The Merge. Notably, the number of validators and the total amount of staked ETH have been increasing. Currently, there are nearly 1.1 million validators on the network, staking 34.8 million ETH.
After The Merge, early ETH staking was locked to ensure a smooth transition to PoS. Network participants could only withdraw their ETH after the Shanghai and Capella upgrades in April 2023 (collectively referred to as Shapella). Following a brief initial withdrawal period, the network observed a sustained net inflow of staked ETH. This indicates that demand for staked ETH remains strong.
So far, 28.9% of the total supply has been staked, forming a robust staking ecosystem valued at over $115 billion. This makes Ethereum the network with the highest amount of staked assets in USD, while also having significant growth potential.
As users pursue rewards from participating in network validation, the staking ecosystem continues to expand. The annualized actual issuance yield is dynamically changing, decreasing as more ETH is staked, as illustrated in the early white paper “Internet Bonds” by Collin Myers and Mara Schmiedt of Obol and Alluvial.
Staking reward rates typically hover around 3%, but validators can also earn additional rewards through priority transaction fees, which increase during periods of high network activity.
To earn these rewards, one can choose to stake ETH as an independent validator or delegate ETH to third-party staking service providers.
Independent stakers need to deposit at least 32 ETH to participate in network validation. This amount is designed to strike a balance between security, decentralization, and network efficiency. Currently, about 18.7% of network participants are independent stakers. Unidentified stakers are often considered independent stakers.
Over time, the appeal of independent staking has declined for several reasons. First, few individuals can afford 32 ETH and possess the technical capability to run an independent validator, limiting widespread independent participation.
Another significant reason is the low capital efficiency of staked ETH. ETH locked in staking cannot be used for other financial activities within the DeFi ecosystem. This means that liquidity cannot be provided for various DeFi projects, nor can ETH be collateralized for loans. This presents an opportunity cost for independent stakers, who must also consider the dynamic reward rates of staked ETH to ensure they achieve the best risk-adjusted returns.
These two issues have prompted the rise of third-party staking platforms, primarily dominated by centralized exchanges and liquid staking protocols.
Staking platforms provide ETH holders with the opportunity to delegate their ETH to other validators for staking, charging a fee for this service. Despite some trade-offs, this method has quickly become the preferred choice for most network participants.
Source: Endgame Staking Economics
The survey results confirm the following points:
69.2% of respondents indicated that their companies are currently staking ETH.
60.6% of respondents stated they use third-party staking platforms.
48.6% of respondents prefer to stake ETH on integrated platforms (such as Coinbase, Binance, Kiln, etc.).
The main reasons respondents choose staking providers include:
Reputation
Variety of supported networks
Pricing
Easy onboarding process
Competitive fees
Professional skills and scalability Finally, the proportion of ETH or staked ETH allocated in respondents' portfolios is as follows:
Liquid Staking Protocols
To address the challenges faced by independent staking, the market for third-party staking platforms has rapidly developed over the past few years. This growth has been primarily driven by breakthroughs in liquid staking technology.
Liquid staking refers to the process of receiving users' ETH through a smart contract protocol, staking it, and returning a liquid staking token (LST) to the user as proof of their staked ETH. LST represents the underlying asset (ETH), is fungible, and typically generates staking rewards automatically, providing users with an easy way to earn returns. Users can redeem their LST for native ETH at any time, although there may be delays due to Ethereum PoS withdrawal restrictions implemented in the Cancun/Deneb upgrade. Liquid Collective provides detailed documentation on deposit and redemption buffers to ensure a smooth user experience.
Deposit and redemption system architecture. Source: Liquid Collective
Liquid staking protocols typically consist of code deployed on-chain and a set of decentralized professional validators, usually selected through DAO governance. Various factors may be considered when selecting validators, such as technical capabilities, security practices, reputation, geographic diversity, or hardware diversity. Users' ETH deposits are centrally managed and then allocated to a collection of validators to reduce the risk of slashing and centralization.
Due to the popularity of liquid staking, many DeFi applications in the on-chain ecosystem have adopted liquid staking tokens, further enhancing their utility and liquidity. For example, many decentralized exchanges (DEXs) have integrated LSTs, allowing holders to provide liquidity for their LSTs immediately or exchange them for other tokens.
The integration of decentralized exchanges (DEXs) is particularly important due to potential delays in withdrawals. While users can redeem their liquid staking tokens (LST) for ETH at any time, the price of LST may deviate from the price of ETH during periods of market stress or high liquidity demand. This is due to the queuing for redemptions. Users who wish to obtain liquidity immediately and are willing to exchange ETH at a discount on DEXs will drive this price deviation. During stable market conditions, redemption queues are typically minimal.
When LST has sufficient liquidity and its price can remain aligned with ETH, it can be adopted by DeFi money markets, further enhancing its value. Leading DeFi money markets, such as Aave and Sky (formerly known as MakerDAO), have integrated LSTs, allowing users to borrow other assets without selling their staked ETH. This approach can enhance yields, as users can earn Ethereum PoS rewards while also generating additional returns by utilizing LST in DeFi strategies.
Ultimately, LST enhances the accessibility of ETH staking, maximizes capital efficiency, and enables new yield-generating strategies.
The survey shows that respondents have a positive attitude towards LST.
52.6% of respondents hold LST.
75.7% are willing to stake ETH through decentralized protocols.
Finally, we asked respondents how their companies use LST.
Advanced Staking Technology
Distributed Validators (DVs)
Liquid staking protocols have found market fit in their current form, attracting retail investors, DeFi users, and crypto funds. However, to attract significant institutional capital inflows, the implementation of Distributed Validators (DVs) may be necessary.
DVs, pioneered by Obol, enhance the security, fault tolerance, and decentralization of the staking network. The core issue that Obol addresses is the risk of centralized failure points in traditional staking configurations. For example, if a validator node goes offline due to hardware failure or software error, it incurs offline penalties. Additionally, validator keys may be duplicated and run on two nodes simultaneously, leading to the risk of "double signing" transactions, which can trigger slashing penalties. This poses a significant risk for institutional participants that require high security and guarantees for delegated ETH staking.
Single-node validators face multiple issues and risks:
No protection against machine failures.
Difficulty in effectively implementing active-passive redundancy setups. Configuration errors, software failures, or lack of monitoring can lead to repeated validation of the same validator key, resulting in slashing penalties.
The hot keys used by validators are vulnerable to attacks.
The scale effects of validator infrastructure may lead to client centralization, increasing the associated risks for end users.
Obol's distributed validators address these issues through multi-node validation technology, achieving trust-minimized staking. By distributing the responsibilities of validators across multiple nodes, this distributed validator setup can maintain the normal operation of a "single" validator even if one node in the cluster fails. Specifically, as long as two-thirds of the nodes in the cluster are functioning properly, the validator can continue to operate. Distributed validators also allow for diversification of client software, hardware, and geographic locations within the same validator, as each node can run different hardware and software configurations. Individual validators and the entire network can achieve high levels of diversification in these aspects.
Obol DV Architecture. Source: Obol (DV Labs) The survey shows that respondents have a very positive attitude towards distributed validators.
65.8% of respondents are familiar with distributed validators.
61.1% are willing to pay higher fees for enhanced security, stability, decentralization, and fault tolerance features.
Overall, awareness of Distributed Validators (DVs) is high, with only 2.6% indicating they are completely unfamiliar with this technology.
No respondents believe that DVs pose significant risks to their staking operations, while 5.6% believe there is no risk at all.
These responses support the view that institutional capital allocators are more inclined to choose DVs as the optimal staking solution.
The Potential and Risks of Restaking
In addition to DVs, restaking is also an important technological innovation that brings new income opportunities for stakers. Restaking allows validators to use their staked ETH or liquid staking tokens (LST) to provide security support for multiple protocols simultaneously, potentially earning additional returns.
However, this also comes with additional risks. Restaked assets are used to secure multiple protocols, and any malicious action or operational error could lead to slashing penalties and losses. Restaking also introduces other risks, including staking centralization, protocol-level vulnerabilities, and network instability.
EigenLayer has already supported Liquid Collective's LsETH. This will allow LsETH holders to earn protocol fees and rewards through the EigenLayer protocol while holding LsETH and receiving ETH network rewards.
Symbiotic also provides support for LsETH holders, who can now earn additional protocol fees and rewards from the Symbiotic protocol while receiving ETH network rewards by holding LsETH.
Survey results show that respondents generally have a positive attitude towards restaking and have a strong understanding of its risks.
55.3% of respondents expressed interest in restaking ETH.
74.4% of respondents indicated they understand the risks of restaking.
Nevertheless, respondents generally perceive restaking as having certain risks.
Our survey shows that 55.9% of respondents are interested in restaking ETH, while 44.1% are not. Considering that 82.9% of respondents indicated they understand the risks of restaking, this suggests a positive attitude towards restaking. However, overall, people still believe that restaking inherently carries risks.
Decentralization and Network Health
Liquid staking tokens (LST) exhibit characteristics of a "winner-takes-all" market, driven by strong network effects formed by multiple factors. As LSTs evolve, they offer better liquidity, lower fees, and more integration with decentralized finance (DeFi) protocols. This widespread adoption deepens liquidity pools, making the tokens more attractive for trading and other DeFi applications. Large LSTs also benefit from economies of scale: they attract more operators because they can generate more fees. This, in turn, enhances security, as more operators can allocate staking. Currently, over 40% of ETH is staked by Lido and Coinbase.
Large LSTs may also benefit from better branding, which respondents in the survey identified as an important factor.
The survey further confirms the concentration phenomenon of third-party staking platforms: over half of the respondents hold stETH.
This situation leads to the concentration of staking power in a few LSTs or centralized exchanges, where large staking pools often rely on a limited number of node operators. This concentration not only contradicts Ethereum's core principle of decentralization but also poses security risks to the network's consensus mechanism and the potential for censorship attacks.
The survey shows that respondents are very concerned about the issue of centralization, with 78.4% expressing worries about validator centralization and generally considering the geographic location of node operators to be very important when choosing third-party staking platforms. The results indicate that the market may be seeking more decentralized alternatives than the current market leaders.
Custody and Operational Practices
Most respondents (60%) use qualified custody services to manage their ETH. Hardware wallets are also popular, with 50% of respondents choosing to use them. In contrast, centralized exchanges (23.33%) and software wallets (20%) are less frequently used for custody purposes.
Respondents generally express a high level of familiarity with node operations, with the majority (65.8%) agreeing or strongly agreeing that they are familiar with node operations, 13% remaining neutral, and 21% disagreeing or strongly disagreeing.
In terms of client diversity, which involves using different software to run Ethereum validators to reduce single points of failure, maintain decentralization, and optimize network performance, respondents generally have a high level of awareness. 50% of respondents indicated they are familiar with this concept, and 31.6% strongly agree. Only 2.6% are unfamiliar with client diversity. Overall, 81.58% of respondents understand the concept of client diversity.
Liquidity is viewed as a very important factor by respondents. On a scale of 1 to 10 (with 10 being the most important), the average score for the importance of liquidity is 8.5, second only to the importance of protecting assets from loss (9.4). Clearly, liquidity is a key consideration for many institutional participants in the ETH staking ecosystem. Additionally, 67% of respondents indicated that the source of liquidity is very important when choosing liquid staking tokens (LST), and they tend to prefer decentralized exchanges such as Curve, Uniswap, Balancer, and PancakeSwap, as well as aggregators (like Matcha) or on-chain exchange platforms (like Curve, Uniswap, Cowswap).
Finally, respondents showed moderate to high confidence in their ability to withdraw staked ETH during market volatility, with the majority (60.5%) expressing confidence in their ability to withdraw during fluctuations, although 21.1% indicated some concerns. These confidence levels suggest that while most feel secure about their ability to withdraw funds, a significant portion still harbors doubts about the safety of the withdrawal process during market turmoil.
Risk Management and Security
Institutions face various risks when staking Ethereum:
Slashing Mechanism: A slashing event may be triggered when a validator produces erroneous proofs, proposes incorrect blocks, or double signs. This means that the validator may lose part of their staked ETH due to violations of protocol rules, and the staking institution may also suffer significant financial losses. Additionally, validators may be penalized for downtime or inactivity. While slashing is an irreversible consequence of malicious behavior, downtime penalties are usually smaller and recoverable.
Liquidity Risk: If staked ETH is locked or liquid staking tokens (LST) lack sufficient liquidity, institutions may find it difficult to quickly exit large positions. Furthermore, fluctuations in the exchange rate between ETH and LST may also lead to losses. 71.9% of respondents expressed concerns about liquidity.
Regulatory Uncertainty: As the global regulatory environment continues to evolve, institutions need to stay updated on regulators' classifications of staking rewards, compliance requirements for validator infrastructure, and the tax implications of staking income. Despite regulatory ambiguity, over half (58.9%) are still willing to stake their ETH, while 17.7% choose to wait and see.
Similarly, 55.9% of respondents do not participate in liquid staking protocols due to a lack of regulatory clarity, while 20% remain neutral.
Overall, regulatory factors influence the decisions of 39.4% of respondents when choosing ETH staking service providers, with 24.3% indicating that they do not consider regulatory factors in their choices. This may be due to the evolving regulatory framework for staking, leading these institutions to focus more on other operational risks they deem more important.
- Operational Risk: Over 90% of respondents indicated they are very familiar with the withdrawal process for ETH staking, suggesting that institutions are aware that delays in the withdrawal process could lead to significant price deviations for LST. However, respondents exhibited varying levels of confidence in their ability to withdraw staked ETH under volatile market conditions, with nearly equal distribution among those feeling confident, neutral, and lacking confidence.
Our survey indicates that to operate validator infrastructure at scale, it is essential to ensure high uptime and performance across multiple validators while protecting private keys and promptly patching software vulnerabilities. Operational challenges have been a focal point of concern for respondents. Among the various metrics used to monitor staking activities, annualized return (APR) and validator uptime are the most important, followed by total rewards paid, proof rates, and liquidity.
*Due to proprietary and regulatory considerations, some survey respondents chose not to answer this question.
The most commonly used tools by responding institutions to monitor staking operations include internal monitoring tools generated by proprietary risk management systems, reports and dashboards provided by staking providers, and Dune.
*Due to proprietary and regulatory considerations, some survey respondents chose not to answer this question.
Additionally, respondents expressed differing views on the importance of pursuing above-average staking yields versus targeting benchmarks.
There is also a divergence among respondents regarding the decision to participate in liquid staking tokens (LST), with 44.4% expressing concerns about regulation and compliance.
Some asset management firms mentioned that custody of LST poses a problem due to the imbalance between risks and cognitive investment versus returns. One respondent stated, "We hold PoS tokens, but they are not mature enough. We don't know where to start dealing with or considering staking, yields, etc. Our team is small. We want to do it in compliance with regulations and limit risks." Another respondent remarked, "LST is not staking. They are decentralized finance (DeFi) disguised as staking."
Notably, banks mentioned in the survey that the ETH held by staking clients and custodied by them would affect disclosures to clients and regulators, introducing new capital requirements and operational risks stemming from the liquidity or lack of liquidity of LST.
Key Trends and Insights
From the survey results, we summarize several key points. The data indicates that liquidity and regulatory transparency are crucial in influencing institutional participation in ETH staking, with many institutions remaining cautious. Overall, the report reveals a complex yet promising environment for institutional ETH staking development, as enterprises explore in an ever-changing market landscape:
Institutions are actively participating in ETH staking, but the degree and manner of participation vary.
Despite the risks, there is a growing interest in decentralized validators (DVs) and restaking technologies.
Decentralization remains an important consideration that influences the choice of providers.
Liquidity is a key factor of concern for institutional stakers, affecting their choices regarding liquid staking tokens (LSTs) and staking methods.
Due to regulatory uncertainty, institutions are adopting different strategies, with some choosing to act cautiously while others are less concerned.
Institutional participants have a high level of awareness regarding the operations and risks of staking.
Despite the risks and challenges associated with Ethereum staking, liquid staking tokens (LSTs), and restaking, these technologies present attractive opportunities for institutional investors as they can generate returns. In a market where traditional fixed-income investment returns are low, Ethereum staking offers relatively stable and predictable yields. Currently, the annualized return for ETH staking is approximately 3-4%, and participants may also receive additional rewards from priority fees. Furthermore, LSTs enhance capital efficiency by allowing staked ETH to be utilized in decentralized finance (DeFi) applications, enabling institutions to earn staking rewards while also leveraging their assets for additional gains.
Overall, the widespread application of LSTs in DeFi protocols creates new market opportunities. With 39.3% of respondents mentioning the use of LSTs in DeFi applications, this trend may continue, further increasing the liquidity and utility of these tokens. Although regulatory issues persist, the adaptability to the regulatory environment surrounding staking seems to be improving.
Participating in staking allows institutional investors to align with the long-term development of the Ethereum network, potentially yielding financial returns while gaining a strategic advantage within the blockchain ecosystem. Despite facing challenges, the potential benefits of staking, liquid staking tokens (LSTs), and restaking appear to outweigh the risks for many institutions. As the ecosystem matures and the proportion of staked ETH significantly increases, these technologies may become an increasingly attractive component of institutional crypto strategies.
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